Burned to a CRSP

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  By Guest Blogger Doug Rowat

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For most, successful stock picking is an impossible task.

Whether it’s succumbing to behavioural biases or poor timing of entry and exit points, most investors fail miserably as stock pickers. Don’t take my word for it, research from Dalbar, JP Morgan and university academics, such as Brad Barber and Terrance Odean at the University of California, Berkeley, all draw similar conclusions.

However, research from Professor Hendrik Bessembinder of Arizona State University may provide the most definitive word yet regarding how difficult stock picking actually is.

Professor Bessembinder and his associates utilized security data from the Center for Research in Securities Prices (CRSP). CRSP has one of the world’s most complete US securities databases, presently housing historical pricing for more than 32,000 active and inactive securities going back almost 100 years.

Bessembinder’s CRSP database analysis concluded that “the best 4% of listed companies explain the net gain for the entire US stock market since 1926.” In other words, if you failed to own this tiny sliver of stocks, and at sufficient weightings…well…good luck outperforming. To be clear, Bessembinder isn’t saying that it’s impossible to beat the market—a select few with elite skill can do it consistently—but for the average investor, it’s extraordinarily difficult.

However, I want to focus on one particular area of stock picking: single-stock ownership. Many investors, who may otherwise be well-diversified, have a tendency to cling dearly to that ONE cherished stock. I’ve seen this often with my own clients. Naturally, the reasoning for hanging on to these singular treasured babies varies, but in the past has included:

• My late husband loved the stock, so it has sentimental value.
• I work there, it’s a fantastic company, so the stock outlook’s great.
• My investing-wiz son (hockey buddy, neighbour, brother-in-law, etc.), recommended it and I think it’ll double from here.

All of the above reasons, of course, imply blind optimism as well as a lack of real research. But here’s what Bessembinder’s clear-eyed analysis actually says about single-stock portfolios:

…despite the positive mean returns, most single-stock portfolios performed poorly, especially at the 90-year horizon. While a slight majority (50.8%) of single-stock strategies generated a positive 90-year return, the median 90-year return is only 9.5%, compared to a 90-year buy-and-hold return on Treasury bills of 1928%. Only 27.5% of single-stock strategies produced an accumulated 90-year return greater than one-month Treasury bills. That is, the data indicates that in the long term (i.e., the 90 years for which CRSP and Treasury bill returns are available), only about one-fourth of individual stocks outperform Treasuries. Further, only 4.0% of single-stock strategies produced an accumulated return greater than the value-weighted market.

So, those are the dismal odds of your one beloved stock actually turning out to be a winner. For whatever reason, you may have convinced yourself that it’s special, but the overwhelming, long-term evidence suggests that it almost certainly isn’t.

Your emotional self might not let you accept it, but in the greater scheme of things, you’re actually much better off simply owning the world’s most boring investment: a 1-month US Treasury bill.

Because these standalone stocks likely have their emotional claws embedded deep within you, it’s tough to sell them. But as one of my university English professors once said to me when I was reluctant to delete a poorly written paragraph from one of my essays: “Delete it, Doug. Sometimes you have to kill your babies.”

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

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About the picture: “Thanks for the effort you put into your blog every day,” writes Terry. “Here is a photo of my parents’ West Highland White Terrier named MacDuff (sadly passed away now) before and after a trip to the groomer.  Hard to believe he’s the same dog, amazing what a difference a trim and shampoo can make. Thought this might make a good for a visual for what before and after maintenance looks like (financial or otherwise).

To be in touch or send a picture of your beast, email to ‘[email protected]’.

Source: https://www.greaterfool.ca/2025/03/15/burned-to-a-crsp/